AUDITING 2

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AUDIT OF PPE

● PPE- include all tangible assets with a service life of more than 1 year and are used in
business operation and nor acquired for resale.
- Audit approach for PPE is generally the same for all groups
- Substantive test of balances for PPE puts emphasis on specific audit obj. related to
existence, ownership and valuation - achieved by substantiation additions and identifying
retirements during the period and verification of depreciation and depletion expense.

● Audit Procedures, Evidence and Assertions

Audit Procedures Audit Evidence Assertions

1. Agreement of SL-GL ● PPE Schedule(GL) ● Existence

(Reconciling General ● Trial Balance(GL) ● Completeness
ledger and subsidiary
ledger)

2. Test of Additions and ● PPE Schedule ● Existence

Disposals ● Completeness
● Rights and Obligation
Ownership Testing ● Registry of Deeds, ● Presentation and
Titles, Contracts Disclosure

3. Depreciation Testing ● PPE Schedule ● Valuation or Allocation

(substantive analytical ● Policy of the company
procedure)

4. Test of Impairment ● Financial Condition ● Presentation and

Disclosure

CLASS DISCUSSION:

● Audit Risk - the risk that the auditor expresses an opinion when the financial statement
are materially misstated
- Inherent risk (more on accounts- low) x Control Risk (company’s internal
control, capitalization of PPE) x Detection Risk (test of controls,
substantive tests)
- Inherent risk of PPE is low because minimal lang ang transactions
 ● Difference

PPE Investment Property Inventory

(cash generating
unit)

Accounting IAS 16 IAS 40 IAS 2

Standard

PPE Class -All type Land & Building FOR All type
- owner occupied LEASE (entity ang
-occupied by emp lessor)
(with/without rent)
-ancillary serv

Purpose 1. For use in 1. Earn rentals 1. For sale in the

production 2. Held for ordinary
2. Supply of capital course of
goods and appreciation business
services 3. For operating
lease only
4. For future
investment

Initial Measurement Cost Cost Cost

Subsequent 1. Cost method 1. Cost method 1. Cost

Measurement 2. Revaluation 2. Fair value
method method

Recoverable Whichever is Whichever is

amount higher: higher
(applicable if cost Net Realizable
1. FV less cost method): Value
of disposal 1. FV less cost (Estimated Selling
(recover if of disposal Price less Cost to
sold) (recover if Sell)
2. Value in use sold)
(recover if 2. Value in use
use) (recover if
use)
Then, whichever is
lower between Value
in Use and Carrying
Amount

Depreciation Yes Yes (but, cost No

model only)
● PPE Trade-ins: (Applicable if there is commercial substance)

- Initial Measurement
1. Fair Value of Asset given up
2. Fair value of asset received
3. Carrying value of asset given up

- Subsequent Measurement
1. Cost model- cost less accumulated depreciation less accumulated impairment
loss
2. Revaluation model- fair value less subsequent accumulated depreciation less
accumulated impairment loss

Scenarios if Initial Recognition of Revalued Amount:

1. If carrying amount is increased:
a. Recognize in other comprehensive income
b. Accumulate in equity under revaluation surplus
2. If carrying amount is decreased
a. Recognize in profit or loss

Scenarios if Subsequent:
1. Increased- Recognize in p/l to the extent it reserves a revaluation
decrease of the same asset previously recognized in profit/loss
2. Decreased- Recognize in OCI to the extent of the credit balance of
revaluation surplus
● Gain/Loss on PPE trade in/disposal of assets
- Selling Price - Carrying Value/Cost (Purchase Price - Acc Dep)
- Receivable - Carrying Value
● Net book value
- Cost - Acc. Dep (sa tanan)
● Depreciation (Assets are already available for use)
1. Recognize in profit or loss
2. Include in the carrying amount of another asset

Formula:
Depreciable Amount/Useful Life
Depreciable Amount = Cost - Residual Value (Selling Price-Cost of
Disposal)

Method:
1. Straight line = (Cost of an Asset - Residual Value) / Useful life
2. Diminishing balance = (Cost of an Asset x Depreciation Rate) /100
3. Units of production = (Cost of Asset - Salvage Value) / Useful life in the
form of units produced
 4. Double Declining = 2 x Cost of Asset x Depreciation Rate
5. Sum of the Year = Remaining Useful Life / Useful Life (ex. if 4 - 4+3+2+1)
6. Declining Balance = Depreciation Rate / Useful Life
● Revaluation Surplus
- Carrying Amount (Cost - Acc. Dep) - Replacement Cost

AUDIT OF NOTES PAYABLE/LOANS PAYABLE

● 2 accounts concerned with an audit of notes payable/loans payable

- Interest Expense
- Interest Payable
● Important feature of liabilities which effects the audit procedures
- liabilities are represented only by documentary evidence which originates mostly
from third parties in their dealings with the entity
● Focus when testing liabilities
- check for understatement (completeness) and omissions of disclosures
● Audit Procedures, Audit Evidence, Assertions

Audit Procedures Audit Evidence Assertions

1. Agreement of SL-GL ● Trial Balance ● Existence

(Reconciling General ● Loan/Borrowing ● Completeness
ledger and subsidiary Schedule (Short-term)
ledger) ● Amortization
Schedule (Long-term)

2. External Confirmation ● Loan/Borrowing ● Existence

(Confirming loans to Schedule (Short-term) ● Completeness
debtors) ● Amortization ● Rights and Obligation
Schedule (Long-term) ● Presentation and
Disclosure

3. Interest expense ● Amortization ● Valuation or Allocation

recomputation (testing Schedule (Long-term)
the accuracy of int
exp, int pay, amort of
discount and
premiums) - test of
reasonableness

4. Testing of compliance ● Refinancing ● Presentation and

of loan covenants agreement (usually for Disclosure
(condition which notes payables)
requires the borrower - Extension of
from undertaking due date of
certain actions) debt
(The borrower replaces their
 current debt obligation with
one that has more favorable
terms.)
● Rollover (usually for
notes payables) -
short term - debt is
paid by debt
- mustang ug
new para ipay
sa old debt

5. Inspection of new ● Debt agreements ● Rights and Obligation

agreements ● Completeness
● Existence
● Presentation and
Disclosure

● Who reconciles the reconciling items?

- Client
● Valuation only applies to normal checking or within the entity
● Contents of Confirmation Letter
1. Unpaid principal amount
2. Interest Rate
3. Date (Interest Last Paid)
4. Collateral/Pledged assets
5. Due date (Terms of the loan)
6. Loan Covenants
- Current and Non-current classification - the purpose of loan covenants
- Waiver - bank gives client a grace period to rectify breach within 1 year
from reporting period. Secured to ensure the covenant’s classification will
remain as non-current.
- As of reporting date - unsay need date iinput sa waiver
- If, after the reporting period - non-adjusting classification
● Who signs the confirmation letter?
- Client, they give authorization to the bank to release information for confirmation
● Types of confirmation
1. Positive confirmation - requires supporting information despite the accuracy of
the original records, needs to be returned to the client. responds regardless of
feedback
- Once returned, control code must be present
a. Blank confirmation - usually for payables
b. With amount - usually for receivables (If naa current and noncurrent
portion sa accounts payable, ang original loan agreement ang pangayuon
as audit evidence)
 2. Negative confirmation - request a response only if the amount stated is incorrect.
respond if there are discrepancies
● Usual buhaton kung fax or email ang i use for sending confirmation letters to ensure
credible ang source
- Check if email domain used is correct or authorized
- Contact the bank to verify
● What if a confirmation letter is sent directly to the client instead of the auditor
- Contact the bank and confirm the details of the letter.
- Usually mangayo ug two copies ang auditor
● What if walay response ang bank sa confirmation letters
- No alternatives for loans payable
- Accounts payable and accounts receivable has alternatives in the standard or
positive confirmation
- If there are no issues, no response is sent, and the absence of that response
serves as a negative confirmation

CLASS DISCUSSION:

● Borrowing Cost
- Costs that are directly attributable to the acquisition, construction, and
production of qualifying assets (at least 1 year ayha mahuman)
- is capitalized
● Loans
1. Specific - Actual Interest Expense - Investment Income on Temporary
Investments
2. General - Average Expenditures x Capitalization Rate (Weighted Average of
Borrowing Cost applicable to outstanding borrowings)
- Specific borrowings should be deducted from the average expenditures
- borrowings cost computed should not exceed the actual interest expense
of general borrowings
● Financial Liabilities
- Initial Measurement- FV +/- Transaction Cost/Price
- Subsequent Measurement - At Cost
● Notes Payable
- If solely issued for cash, presented at FV/Cash proceeds
- If issued to purchase equipment, FV is the cash price of the equipment
Initially Subsequently

not designated at P/L FV - TC Amortized Cost

designated at P/L FV FV

Short-term interest bearing,

short-term non-interest FV FV
bearing, long-term interest
bearing

long-term non-interest PV Amortized Cost

bearing

● Bonds payable
- At a premium- NR is higher than ER, sales price is higher than face amount
- At a discount - ER is higher than NR, sales price is less than face amount
- At face value
- Effective Interest Expense = Carrying Amount of Bonds (FV of bond -Discount) x
Effective Rate
- Premium Amortization = Nominal Interest (Nominal Rate x Face Amount) -
Effective Interest (Effective Rate x Carrying Amount)
- Discount Amortization = Effective Interest (Effective Rate x Carrying Amount)
- Nominal Interest (Nominal Rate x Face Amount)
- See table sa gallery

Initial Subsequent

not designated FV - TC Amortized Cost

designated FV FV

● Gain/Loss on Retirement
- Carrying Amount (Bonds Payable -Discounts [Discount-Amort sa Discoun] -
Retirement Price
● Bond Outstanding - 173

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